Announcements Financial Institutions Rating Alerts

GCR affirms the BBB-(KE) Long-term Kenyan National Scale Rating of ASL Credit Limited

Rating Action

Johannesburg, 24th October 2019 – GCR Ratings (‘GCR’) has affirmed the long and short-term Kenyan national scale ratings of ASL Credit Limited (‘ASL Credit’) at BBB-(KE)/A3(KE) respectively, with the outlook accorded as Stable. The Kenyan national scale short term issue rating on the commercial paper has been affirmed at A3(KE).

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook

ASL Credit Limited

Issuer Long Term

National

BBB-(KE)

Stable Outlook

Issuer Short Term

National

A3(KE)

Commercial Paper

Issue Short Term

National

A3(KE)

On May 22, 2019 GCR announced that it had released new criteria for all banks and bank-like entities, titled Criteria for Rating Financial Institutions. As a result, the ratings were placed ‘Under Criteria Observation’. Subsequently, GCR has finalised the review under the new methodology. As a result, the ratings have been removed from ‘Under Criteria Observation’.

Rating Rationale

The BBB-(KE)/A3(KE) Kenyan national scale ratings on ASL Credit reflect its modest business profile and small size relative to domestic commercial banks, offset by a defendable niche and benefits from synergies within the wider complex Ramco Group. The ratings also take into account adequate capitalisation, a relatively sound risk position, and a concentrated funding structure countered by good liquidity. The ratings also factor in the following core elements of Kenyan Country and Financial Institutions Sector risk into their assessment.

Republic of Kenya, Country Risk Score: ‘4.5’

Kenya’s country risk score of ‘4.5’ balances its position as a regional hub, the low wealth economy, with improving institutional effectiveness, high economic growth and growing fiscal pressures at the government level. GCR expect GDP per capita to range around $2,000 and GDP growth of above 5.5% for the next 12-18 months. The institutional score is supported by the vitality of the private sector, whereas politics and corruption weigh the score down. GCR believe the Kenyan sovereign’s fiscal position will continue to deteriorate over the next 12-18 months, as spending increases are not matched by revenues.

Kenyan nonbank- financial institutions sector risk score: ‘1.5’

The Kenyan financial institutions sector risk score of ‘3.5’ balances the good economic growth and diversification with an increasingly strained government fiscal position and weak sector-wide asset quality, with non-performing loans of around 12% at Dec 31st, 2018. Positively, the foreign currency exposures (around 20-25%) are moderate for the region. We also consider the sector to be somewhat overbanked and strongly competitive. Regulation is broadly in line with the regional average, however, the interest rate cap which restrains profitability and moderate credit extension is not considered positively. We consider the funding for the top end of the market to be stable, dominated by retail and corporate deposits. However, institutional investor concentrations permeate elements of the second and third tiers of the sector. We have reduced the sector risk score for non-bank financial institutions to ‘1.5’ to reflect the less stringent prudential regulation and oversight, alongside a lack of access to the Central Bank window.

ASL Credit Limited

ASL Credit is part of the Ramco Group, a privately-owned group of over 40 companies operating across four East African countries, which services the niche sector of Kenyan hire purchase. Though ASL Credit is relatively small compared to commercial banks, the company is able to exploit the operational synergies across the Ramco group of companies including access to group customers and business lines. Due to the fact that the majority of the group operates as a standalone legal entity, with limited cross-group credit linkages, we have not capped or uplifted the rating on ASL Credit due to group weaknesses or strengths. However, the group’s complexity and lack of transparent structure acts a restraint to ratings.

The company had a sound GCR financial leverage ratio of 12.2% at FY18 (FY17: 14.9%), which we expect to range between 13% to 15%. While reserving is considered low in relation to rated peer banks, recoveries appear to be strong due to the effective realisation of collateral. Earnings are solid. The EBITDA margin was a high 72.6% at FY18 with returns on equity of 14.3%.

The risk profile is a positive rating factor. The gross non-performing loan ratio increased to 4% at 30 June 2019, from 2% at 31 December 2017, primarily as a result of large single name exposures. However, the company has recorded consistently low credit losses, of below 0.8%, over the past three years, reducing further to 0.4% at 31 December 2018. Furthermore, forex risk is considered to be modest in comparison to peers, with foreign currency loans accounting for 17% of total loans.

ASL Credit’s funding is relatively concentrated and expensive in comparison to commercial banking peers in Kenya. At 14 September 2019, the top one and three bank facilities provided 46.1% and 73.3% of total undrawn facilities respectively. Furthermore, the reliance on short and medium-term funding, particularly the reliance on bank overdrafts, does somewhat weaken funding stability. At the same time, cost of funding was around 8.2% compared to around 3.2% for the top tier of the Kenyan sector. Positively, liquidity is considered to mitigate these weaknesses. Liquidity management is short term focused as evidenced by high liquidity asset coverage of short-term notes of 86.9% at 14 September 2019. At FY18, total sources covered 2.4x total uses (FY17: 0.5x). Liquid assets’ composition of total assets was negligible, with liquidity primarily supported by available standby facilities.

Rating Outlook

The outlook is Stable. With the currently good levels of earnings and credit losses, we think asset quality will be stable over the next 12-18 months balancing strong growth with some strains creeping into the Kenyan corporate sector.

Rating Triggers

There is limited upside potential. A more diversified long-term funding structure, coupled with improvement in the corporate structure, will be viewed positively. The ratings could be lowered if asset quality deteriorates or capitalisation suffers.

Analytical Contacts

Primary analyst

Vimbai Muhwati

Financial Institutions Analyst

Johannesburg, ZA

vimbaim@GCRratings.com

+27 11 784 1771

     

Committee chair

Matthew Pirnie

Sector Head: Financial Institutions

Johannesburg, ZA

matthewp@GCRratings.com

+27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019

Criteria for Rating Financial Institutions, May 2019

GCR Ratings Scale, Symbols & Definitions, May 2019

GCR Country Risk Scores, June 2019

GCR Financial Institutions Sector Risk Score, July 2019

Ratings History

ASL Credit Limited

Rating class

Review

Rating scale

Rating class

Outlook

Date

Issuer Long Term

Initial

National

BBB-(KE)

Stable

June 2017

Last

National

BBB-(KE)

Stable

June 2018

Issuer Short Term

Initial

National

A3(KE)

Stable

June 2017

Last

National

A3(KE)

Stable

June 2018

Commercial Paper

Initial

National

A3(KE)

Stable

June 2017

Last

National

A3(KE)

Stable

June 2018

Risk Score Summary

Risk score

 

 

 

Operating environment

6.0

Country risk score

4.5

Sector risk score

1.5

   

Business profile

-0.5

Competitive position

0.0

Management and governance

-0.5

 

 

Financial profile

1.5

Capital and Leverage

0.5

Risk

1.0

Funding structure and Liquidity

0.0

   

Comparative profile

0.0

Group support

0.0

Peer analysis

0.0

   

Total Score

7.0

Glossary

Capital

The sum of money that is invested to generate proceeds.

Cash

Funds that can be readily spent or used to meet current obligations.

Cash Flow

The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.

Credit Rating

An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.

Debt

An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.

Liquidity

The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price. 

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

ASL Credit Limited participated in the rating process via face-to-face management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information used to analyse ASL Credit Limited and accord the credit ratings included:

  • Audited financial results of ASL Credit Limited at 31 December 2018;
  • 2019 budgets;
  • Interim accounts to 30 June 2019 and;
  • A breakdown of facilities available and related counterparties.


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